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Article - Why do Projects Really Go Over the Budget?

Submitted by Jamal Moustafaev on Thu, 08/18/2016 - 13:33

I recently came across the “Olympic Proportions: Cost and Cost Overrun at the Olympics 1960-2012” article published by Bent Flyvbjerg in 2012. One of the figures that really got my attention was a table describing the actual costs and budget overruns of the Olympic Games between 1968 and 2012 (see Table 1).

There are currently three theories attempting to explain our helplessness when it comes to accurate project estimation. In a nutshell, here are explanations by three different schools of thought:

The Standard Economic Theory Explanation - If companies take rational risks in order to earn abnormal incomes, these poor outcomes are inevitable. One of the key laws of the financial theory states that in a perfect market, the higher the expected return of an asset, the higher is the inherent risk associated with it.

The "Mass Delusion" Explanation - Modern business decision making is seriously flawed because of the delusional optimism (optimism bias) that forces people to overestimate the benefits and underestimate the costs of future projects.

The Machiavelli Factor Explanation – executives and politicians are deliberately cooking the books in order to make the project proposals look more attractive. In addition, executives are rewarded with heavy incentives for rosy forecasts and face very minor penalties when their predictions proved to be wrong.

I personally tend to lean towards the blend of theories #2 and #3. In my experience the following happens:

Projects in the government sector – 25% optimism bias and 75% Machiavelli factor

So, having voiced my opinion on the topic, what is yours?

The main reason for project underestimation is:

Standard Economic Theory – there is no specific reason. We are all playing in the free market. You lose some, you win some.

Mass Delusion Theory – we as the species of homo sapiens will always tend to underestimate the complexity of the tasks at and and overestimate our abilities

Machiavelli Theory – the executives/politicians usually know that the projects they are initiating are going to cost way more. They are just lying to get the stakeholders “a little bit pregnant” until there is no way back.

Please leave your comment below.

About the Author

Jamal Moustafaev, MBA, PMP – president and founder of Thinktank Consulting is an internationally acclaimed expert and speaker in the areas of project/portfolio management, scope definition, process improvement and corporate training. Jamal Moustafaev has done work for private-sector companies and government organizations in Canada, US, Asia, Europe and Middle East. Read Jamal’s Blog @ www.thinktankconsulting.ca